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Starling and Zopa show path to challenger bank profitability

digital banks profit

Starling Bank has been profitable for the past 18 months, the UK challenger bank’s CEO and founder Anne Boden has said.

Founded in 2014, the British digital bank broke even for the first time in October 2020. It has been profitable ever since, with Boden’s comments confirming that Starling is on course to post its first annual profit when it publishes its next accounts.

“We’ve been profitable for the past 18 months – we’ve grown and taken huge market share, but unlike some competitors, we’ve done that in a profitable way because we’ve focused on customers that actually generate income for us in the long term,” said Boden, speaking at the Innovate Finance Global Summit on Monday.

Starling becoming profitable is a sign that the UK’s fintech market is maturing.

This week, British challenger digital bank Zopa said it has become profitable 21 months after gaining its full UK banking licence in June 2020.

“Hitting profitability in just 21 months is a testament to our unique model that meets customer needs by focusing on how they borrow and save – the two things with the most impact on finances,” said Jaidev Janardana, CEO, Zopa.

Janardana added that it makes Zopa one of the fastest digital banks to achieve profitability after gaining its banking licence.

Zopa Bank told UKTN it calculates profitability “the normal, default way of measuring profitability using the IFRS9 standard”.

Other digital challenger banks have struggled to convert customers into profits, with rivals Monzo and Revolut still loss-making.

Boden said that other fintechs have grown accounts “but in the wrong sectors”, which has meant they have “needed to feed off more and more VC capital”.

Boden added that investors give limited time to demonstrate a business model and asked how long the VCs are willing to give.

According to Starling Bank, it currently has 3% of the retail market share and 7% of SME lending.

Starling Bank is reportedly on track for its public debut by 2023. Boden said that while the fintech sector has “given the big banks a run for their money”, she doesn’t see challenger banks gaining the dominant market share enjoyed by Google in search engines.

“Starling will grow until it has the market share of an HSBC or Lloyds,” Boden said.

Later this year Zopa will join the increasingly competitive BNPL market, which last month saw new player PollenPay launch and Openpay exit the UK market.

Last month Zopa Bank offered sponsorship of 50 work visas of eligible Ukrainian applicants already in the UK and in October became a unicorn in a £220m funding round.

This follows a bumper 2021 for UK fintech investment, with companies raising $11.6bn in capital.